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Chapter 12
Solution
The answer is (B).
Actual borrowing (LIBOR + 0.50%)
Payment to bank (4.00)
Receipt from bank LIBOR
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Net (4.50%)
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The interest fixing date is the start date of the year (1 January 20X1), so the
relevant LIBOR rate is 4.10%.
Hence, Ocean Co paid 4.50% overall net interest on its $5 million borrowing
($225,000 in the year) rather than the (4.10% + 0.50% =) 4.60% rate it would
have paid without the swap ($230,000 in the year).
This is a saving of $5,000.
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